Under the non-elective option, an employer that sponsors a SIMPLE IRA contributes 2% of each eligible employee’s compensation to that employee’s account every year, whether or not the employee defers any of their own pay. For 2026, compensation counts up to $360,000, which puts the maximum contribution per employee at $7,200.1Internal Revenue Service. Retirement Topics – SIMPLE IRA Contribution Limits The contribution vests immediately, and the employer’s obligations around notice, deposit timing, and correction are what separate a clean plan year from an expensive one.
How the 2% Is Calculated
The math is direct. Take each eligible employee’s total compensation for the calendar year and multiply by 2%. Compensation means wages, salaries, and fees for personal services. Only the first $360,000 counts for 2026, a figure that adjusts annually for inflation.2Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions
An employee earning $50,000 receives a $1,000 contribution. An employee earning $400,000 receives $7,200, because compensation above the cap is ignored. The employer runs the calculation individually for every eligible employee and deposits the result into that employee’s SIMPLE IRA.
All employer contributions vest immediately. The money belongs to the employee the moment it lands in the account. There is no graduated schedule and no forfeiture if the employee leaves.3Internal Revenue Service. SIMPLE IRA Plan
Who Has to Receive It
An employee is eligible if they meet two conditions:
- They received at least $5,000 in compensation during any two preceding calendar years, which do not have to be consecutive.
- The employer reasonably expects them to earn at least $5,000 during the current calendar year.
A plan cannot impose stricter conditions than these. An employer cannot, for example, require a full year of service or exclude part-time workers as a category. Part-time, seasonal, and leased employees who clear both thresholds must be included.4Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
The point that distinguishes the non-elective route from the matching alternative: when the employer picks the 2% option, every eligible employee gets a contribution, including those who chose not to defer any of their own salary. With matching, an employee who contributes nothing gets nothing from the employer.
The Annual Choice Between Matching and Non-Elective
Each year the employer picks one of two formulas. The first is a dollar-for-dollar match of employee salary deferrals up to 3% of compensation, which can be reduced to as low as 1% in no more than two out of any five calendar years. The second is the 2% non-elective contribution, which has no comparable flexibility. It is always 2%.3Internal Revenue Service. SIMPLE IRA Plan
Employers that want a predictable, knowable cost and less tracking of individual deferrals tend to prefer the non-elective formula. The aggregate cost is often slightly higher than a match would be, because contributions go out to non-deferring employees too, but the administration is simpler: one flat percentage against eligible payroll.
The choice has to be made before the plan year starts. That means notifying employees before the 60-day election period, which generally runs from November 2 through December 31 for the following calendar year.4Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans
The Annual Notice
Before that 60-day window opens each year, the employer must give every eligible employee written notice covering:3Internal Revenue Service. SIMPLE IRA Plan
- The employee’s right to make or change salary reduction contributions.
- Whether the employer will use matching or non-elective contributions for the coming year.
- The employee’s ability to choose a financial institution for the SIMPLE IRA, if the plan allows it.
- A summary description of the plan, usually supplied by the financial institution holding the accounts.
- If the employer uses a designated financial institution, written notice of the employee’s right to transfer the balance without cost or penalty.
If the employer is switching from matching to non-elective, the notice about the switch has to go out within a reasonable time before the election period begins.4Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans Employers using IRS Form 5304-SIMPLE or 5305-SIMPLE to set up the plan can meet the notice requirement by giving employees a copy of the signed form, which contains a model notification.
The Deposit Deadline
Non-elective contributions must reach employees’ SIMPLE IRA accounts no later than the due date of the employer’s federal income tax return for the year, including any extensions.4Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans For a calendar-year employer, that typically means April 15 of the following year, and filing for an extension moves the contribution deadline out with it.
The generous window exists because the employer needs final payroll numbers before it can calculate precise 2% amounts. Cutting it close is still risky. If the financial institution needs several business days to process the deposit and the funds don’t land in employee accounts by the filing deadline, the employer has a compliance failure. A two-week buffer avoids the problem.
A Note for Self-Employed Owners
Sole proprietors and partners who participate in their own SIMPLE IRA cannot just multiply net profit by 2%. Their compensation for plan purposes is net earnings from self-employment, reduced by the deductible portion of self-employment tax and by the plan contribution itself. Because the contribution depends on plan compensation and plan compensation depends on the contribution, the calculation is circular.5Internal Revenue Service. Self-Employed Individuals – Calculating Your Own Retirement Plan Contribution and Deduction
The IRS supplies worksheets in Publication 560 that use a reduced contribution rate to break the loop. Working through those worksheets, or handing the calculation to an accountant, is the safe route. Getting it wrong produces excess or under-contributions, both of which require correction.
Optional Additional Contributions Under SECURE 2.0
Starting in 2024, the SECURE 2.0 Act gave employers the option to make additional non-elective contributions on top of the standard 2%. These can be up to 10% of each eligible employee’s compensation, subject to a per-employee dollar cap that started at $5,000 and is adjusted annually for inflation.6Internal Revenue Service. Notice 2024-02 – Miscellaneous Changes Under the SECURE 2.0 Act of 2022 The contribution rate has to be uniform across all eligible employees.
This piece is optional. The mandatory obligation under the non-elective formula is still the 2% contribution. But for an employer that wants to put more into employee accounts without stepping up to a 401(k), the additional layer is available.
Deduction and Startup Credit
Non-elective contributions are fully deductible as a business expense on the employer’s federal income tax return.4Internal Revenue Service. Retirement Plans FAQs Regarding SIMPLE IRA Plans The deduction is taken for the tax year with or within which the relevant calendar year ends, and contributions made after year-end but before the tax filing deadline (including extensions) count for the prior year.7Office of the Law Revision Counsel. 26 U.S. Code 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan
Small employers may also qualify for a tax credit on contributions during the first five years of a new SIMPLE IRA. For employers with 1 to 50 employees, the credit covers 100% of contributions in the first two years, then 75%, 50%, and 25% in years three through five, up to $1,000 per participating employee per year. Employers with 51 to 100 employees receive a reduced version. The credit sits on top of the deduction.8Internal Revenue Service. Retirement Plans Startup Costs Tax Credit
Fixing a Missed Contribution
Failing to make the required 2% contribution is an operational failure, and the plan’s tax-favored status is at risk until the error is corrected.9Internal Revenue Service. SIMPLE IRA Plan Fix-It Guide The correction itself is mechanical. The employer deposits the missed amount plus an adjustment for lost earnings through the date of correction, so employees end up where they would have been had the deposit landed on time. The employer also needs procedures in place to keep the mistake from recurring.
The IRS Employee Plans Compliance Resolution System, or EPCRS, is the framework. For a straightforward missed contribution caught promptly, the Self-Correction Program may be enough: the employer fixes the failure without contacting the IRS or paying a fee. More complex situations, or cases where an employer wants written IRS approval of the fix, go through the Voluntary Correction Program, which involves an application, a user fee, and Form 8950 submitted through Pay.gov. Failures identified during an IRS examination are handled through the Audit Closing Agreement Program.10Internal Revenue Service. EPCRS Overview
The worst-case outcome of doing nothing is plan disqualification, which would strip the tax benefits from every participant. In practice the IRS prefers correction, but only if the employer actually takes the steps. Finding a missed contribution six months in and letting it sit is where employers move from a mechanical fix to a serious problem.